EADS-BAE merger plan hits political crunch point

PARIS/FRANKFURT – Tensions over a supermerger between EADS and BAE Systems spilled into the open on Friday and cast doubt on a rapidly approaching deadline as France, Britain and Germany jockeyed over the role of the state in the world's largest aerospace and arms group.

After rattling investors with a $45 billion merger project last month, the chief executives of Europe's largest aerospace firms headed into the weekend with the fate of their historic tie-up plans hinging on events outside their control.

"The companies don't think it's all over so we can expect a fairly agitated weekend of phone calls," a diplomatic source familiar with steadily rising contacts between capitals said.

While both firms want a minimum government presence, mainly in order to protect BAE's key defense interests in the United States, the deal has sparked a three-way political logjam.

France wants to keep a stake but will not rule out adding more, Germany wants to match France's role to avoid being left aside by Europe's other main powers and Britain wants to cap state involvement, several people familiar with the talks said.

Time is running out before a UK stock market deadline of October 10 for a blueprint of the deal, which affects national security interests on both sides of the Atlantic.

A French government source said the deadline could be extended by 28 days, something the companies are so far reluctant to do in the absence of concrete progress.

Senior aides to the leaders of all three countries held a video conference on Friday and "put everything on the table to see if we can go forward," the source added.

EADS and BAE denied a German report that this had resulted in deadlock and that the merger proposal had collapsed.

"We have been informed by the governments about the status of the discussions, but in no way have we been told that the deal is off," a spokesman for Airbus parent EADS said.

"We continue to work towards the October 10 deadline that we have been given by the UK government," he added.

Nonetheless, a number of potential stumbling blocks have emerged since the proposal was announced. These include conflicting political interests in Britain, France and Germany, as well as some shareholders' dissatisfaction with the terms.

Germany is holding out for the same role as France, which would hold a diluted stake of 9 percent in the new group, or 10 percent when a small investment by state bank CDC is included. This would entail buying shares held by car firm Daimler.

Both countries want the prestigious headquarters.

A new stumbling block emerged overnight as sources involved in the talks told Reuters that France was under pressure to throw away the key to future government share purchases.

France has a 15 percent stake in EADS and under current arrangements could buy out industrial partner Lagardere, a French media firm which wants to sell its 7.5 percent stake.

Together the stakes add up to 13.5 percent after dilution under the proposed 60:40 merger that leaves EADS in control.

Britain wants France to rule out such purchases in order to make the deal more presentable to authorities in the United States, where BAE earns nearly half of its revenue.

But the French government source said Paris did not want to be "shackled" and refused to sign away any future rights.

STABILITY PACT

Created in 2000, EADS is controlled by a pact between the French state and two core industrial shareholders, Lagardere and German carmaker Daimler. The trio collectively own 45 percent.

EADS wants to scrap the pact in order to rid the company of special interests and give it "normalized" corporate governance.

The priority for Britain is to ensure that the deal is as watertight as possible against any objections from the United States, where it will be subject to a thorough review.

Its proposal would effectively replace the shareholder pact with a form of industrial 'stability pact' freezing government involvement. But the idea raises thorny questions of sovereignty that have bedevilled European politics in recent years.

Most sources close to the talks said they did not think this issue would be allowed to become a dealbreaker.

With pride and power at stake, brinkmanship had been widely expected in the run-up to the October 10 deadline, echoing European negotiations on matters from farm aid to debt bailouts where racing the clock is the favored way to hammer out disputes.

But the wait means another frustrating weekend for minority investors who have demanded details of the proposal to create a European player outstripping U.S. giants Lockheed and Boeing.

"As far as we are concerned, there's been no attempt to explain the rationale for the deal to investors," said Barry Norris of Argonaut Capital Partners, an EADS investor.

Shares in both companies edged 1-2 percent higher, clawing back part of the double-digit losses EADS in particular has sustained since the talks became public last month.

With time running out for a deal, Britain and France are seen as most enthusiastic about the proposed merger while Germany has so far been the most critical, negotiators said.